##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2007
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the transition period from               to
 Commission file number 000-32469
 THE PRINCETON REVIEW, INC.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    22-3727603(I.R.S. Employer
Identification No.)
 2315 Broadway New York, New York(Address of principal executive offices)
    
    10024(Zip Code)
 Registrants telephone number, including area code:
(212) 874-8282
 þ o
  o þ o
 o þ




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TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURES
    
    
    25EX-10.54: AMENDMENT TO SERVICE AND LICENSE AGREEMENTEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 
 THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETS:Current assets:Cash and cash
equivalents
    
    $
    44,230
    
    
    $
    10,822Accounts receivable, net of allowance of $5,188 in 2007 and $2,848 in 2006
    
    
    11,692
    
    
    
    31,531Accounts receivable-related parties
    
    
    95
    
    
    
    124Other receivables
    
    
    3,359
    
    
    
    1,999Inventory
    
    
    2,701
    
    
    
    2,950Prepaid expenses
    
    
    1,199
    
    
    
    1,653Other current assets
    
    
    1,189
    
    
    
    2,612Other current assets related to discontinued operations
    
    
    
    
    
    
    181Total current assets
    
    
    64,465
    
    
    
    51,872Furniture, fixtures, equipment and software development, net
    
    
    20,523
    
    
    
    18,340Goodwill
    
    
    31,006
    
    
    
    31,006Investment in affiliates
    
    
    1,639
    
    
    
    1,639Other intangibles, net
    
    
    9,506
    
    
    
    11,527Other assets
    
    
    1,384
    
    
    
    1,744Other assets related to discontinued operations
    
    
    
    
    
    
    1,980Total assets
    
    $
    128,523
    
    
    $
    118,108LIABILITIES & STOCKHOLDERS EQUITY:Current liabilities:Line of credit
    
    $
    
    
    
    $
    3,000Accounts payable
    
    
    3,916
    
    
    
    15,220Accrued expenses
    
    
    13,763
    
    
    
    11,277Current maturities of long-term debt
    
    
    1,227
    
    
    
    1,369Deferred income
    
    
    16,059
    
    
    
    20,672Liabilities related to discontinued operations
    
    
    
    
    
    
    2,541Total current liabilities
    
    
    34,965
    
    
    
    54,079Deferred rent
    
    
    2,508
    
    
    
    2,558Long-term debt
    
    
    1,347
    
    
    
    14,127Fair value of derivatives and warrant
    
    
    
    
    
    
    181Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized;
none issued and outstanding at September 30, 2007,
6,000 shares issued and outstanding at December 31, 2006
    
    
    
    
    
    
    6,000Series C Preferred Stock, $0.01 par value; 60,000 shares authorized;
60,000 shares issued and outstanding at September 30, 2007
none issued and outstanding at December 31, 2006
    
    
    56,785
    
    
    
    Preferred stock, $0.01 par value; 4,930,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; 100,000,000 shares authorized; 28,092,100 and 27,601,268
issued and outstanding at
September 30, 2007
and December 31,
 2006, respectively
    
    
    280
    
    
    
    276Additional paid-in capital
    
    
    119,317
    
    
    
    117,082Accumulated deficit
    
    
    (86,431
    )
    
    
    (75,871
    )Accumulated other comprehensive loss
    
    
    (248
    )
    
    
    (324
    )Total stockholders equity
    
    
    32,918
    
    
    
    41,163Total liabilities and stockholders equity
    
    $
    128,523
    
    
    $
    118,108
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006RevenueTest Preparation Services
    
    $
    26,471
    
    
    $
    26,708
    
    
    $
    81,090
    
    
    $
    75,141K-12 Services
    
    
    7,167
    
    
    
    7,588
    
    
    
    29,102
    
    
    
    26,001Total revenue
    
    
    33,638
    
    
    
    34,296
    
    
    
    110,192
    
    
    
    101,142Cost of revenueTest Preparation Services
    
    
    10,436
    
    
    
    9,478
    
    
    
    30,568
    
    
    
    25,673K-12 Services
    
    
    3,627
    
    
    
    5,838
    
    
    
    16,069
    
    
    
    16,402Total cost of revenue
    
    
    14,063
    
    
    
    15,316
    
    
    
    46,637
    
    
    
    42,075Gross Profit
    
    
    19,575
    
    
    
    18,980
    
    
    
    63,555
    
    
    
    59,067Operating expenses
    
    
    25,336
    
    
    
    21,523
    
    
    
    69,700
    
    
    
    63,942Income (loss) from operations
    
    
    (5,761
    )
    
    
    (2,543
    )
    
    
    (6,145
    )
    
    
    (4,875
    )Interest income (expense)
    
    
    165
    
    
    
    (168
    )
    
    
    (677
    )
    
    
    (390
    )Other income (expense)
    
    
    (3,788
    )
    
    
    18
    
    
    
    (7,551
    )
    
    
    (77
    )Equity in the income (loss) of affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )Income (loss) before income taxes
    
    
    (9,384
    )
    
    
    (2,693
    )
    
    
    (14,373
    )
    
    
    (5,392
    )(Provision) benefit for income taxes
    
    
    800
    
    
    
    
    
    
    
    1,278
    
    
    
    Net income (loss) from continuing operations
    
    
    (8,584
    )
    
    
    (2,693
    )
    
    
    (13,095
    )
    
    
    (5,392
    )Discontinued operationsIncome (loss) from discontinued operations
    
    
    (1,267
    )
    
    
    302
    
    
    
    (314
    )
    
    
    (3
    )Gain from disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    4,539
    
    
    
    (Provision) benefit for income taxes
    
    
    (1,117
    )
    
    
    
    
    
    
    (1,690
    )
    
    
    Income (loss) from discontinued operations
    
    
    (2,384
    )
    
    
    302
    
    
    
    2,535
    
    
    
    (3
    )Net income (loss)
    
    
    (10,968
    )
    
    
    (2,391
    )
    
    
    (10,560
    )
    
    
    (5,395
    )Dividends and accretion on Series C and B-1 Preferred Stock
    
    
    (883
    )
    
    
    (106
    )
    
    
    (1,090
    )
    
    
    (411
    )Income (loss) attributed to common stockholders
    
    $
    (11,851
    )
    
    $
    (2,497
    )
    
    $
    (11,650
    )
    
    $
    (5,806
    )Earnings (loss) per shareBasic and DilutedIncome (loss) from continuing operations
    
    $
    (0.34
    )
    
    $
    (0.10
    )
    
    $
    (0.51
    )
    
    $
    (0.21
    )Income (loss) from discontinued operations
    
    $
    (0.08
    )
    
    $
    0.01
    
    
    $
    0.09
    
    
    $
    (0.00
    )Income (loss) attributed to common shareholders
    
    $
    (0.42
    )
    
    $
    (0.09
    )
    
    $
    (0.42
    )
    
    $
    (0.21
    )Weighted average shares used in computing
income (loss) per share
    
    
    28,031
    
    
    
    27,575
    
    
    
    27,823
    
    
    
    27,574
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
 For the Nine MonthsEnded September 30,2007
    
    
    2006Cash flows provided by (used for) operating activities:Net income (loss) from continuing operations
    
    $
    (13,095
    )
    
    $
    (5,392
    )Adjustments to reconcile net income (loss) to net cash provided by operating activitiesDepreciation
    
    
    2,169
    
    
    
    1,669Amortization
    
    
    4,013
    
    
    
    4,592Bad debt expense
    
    
    1,648
    
    
    
    878Write-off of deferred financing costs
    
    
    24
    
    
    
    Write-off of inventory
    
    
    
    
    
    
    280Change in fair value of derivatives
    
    
    7,615
    
    
    
    (299
    )Deferred rent
    
    
    (51
    )
    
    
    231Stock based compensation
    
    
    2,740
    
    
    
    669Other, net
    
    
    184
    
    
    
    433Net change in operating assets and liabilities:Accounts receivable
    
    
    16,860
    
    
    
    2,331Inventory
    
    
    249
    
    
    
    (343
    )Prepaid expenses
    
    
    455
    
    
    
    273Other assets
    
    
    1,280
    
    
    
    (529
    )Accounts payable and accrued expenses
    
    
    (8,815
    )
    
    
    (6,556
    )Deferred income
    
    
    (4,613
    )
    
    
    4,738Net cash provided by (used for) operating activities
    
    
    10,663
    
    
    
    2,975Cash provided by (used for) investing activities:Purchases of furniture, fixtures, equipment and software development
    
    
    (6,365
    )
    
    
    (5,158
    )Additions to capitalized K-12 content, capitalized course costs
    
    
    (42
    )
    
    
    (1,249
    )Payment of related party loan
    
    
    293
    
    
    
    345Payment of note receivable
    
    
    86
    
    
    
    266Payment of loan receivable
    
    
    
    
    
    
    250Net cash provided by (used for) investing activities
    
    
    (6,028
    )
    
    
    (5,546
    )Cash flows provided by (used for) financing activities:Redemption of Series B-1 Preferred Stock
    
    
    (6,000
    )
    
    
    (4,377
    )Termination
of fair value of derivatives and warrants
    
    
    (7,796
    )
    
    
    Proceeds
from the sale of Series C Preferred Stock, net of issuance cost
    
    
    55,929
    
    
    
    Proceeds from revolving credit facility
    
    
    
    
    
    
    10,000Payments of borrowings under revolving credit facility
    
    
    (15,000
    )
    
    
    Payment of credit facility deferred financing costs
    
    
    
    
    
    
    (168
    )Capital lease payments
    
    
    (520
    )
    
    
    (607
    )Dividends on Series B-1 Preferred Stock
    
    
    (233
    )
    
    
    (411
    )Notes payable related to acquisitions
    
    
    (410
    )
    
    
    (560
    )Proceeds from exercise of options
    
    
    586
    
    
    
    11Net cash provided by (used for) financing activities
    
    
    26,556
    
    
    
    3,888Total cash flows used in continuing operations
    
    
    31,191
    
    
    
    1,317Cash Flows from Discontinued OperationsIncome from discontinued operations
    
    
    (314
    )
    
    
    (3
    )Gain on disposal of discontinued operations
    
    
    (4,539
    )
    
    
    Other adjustments to reconcile net income to net cash provided by
operating activities
    
    
    (1,910
    )
    
    
    (1,040
    )Net cash provided by (used for) operating activities
    
    
    (6,763
    )
    
    
    (1,043
    )Cash received from disposal of discontinued operations
    
    
    7,000
    
    
    
    Other cash provided by investing activities
    
    
    1,980
    
    
    
    92Net
cash provided by (used for) investing activities
    
    
    8,980
    
    
    
    92Net cash provided by (used for) discontinued operations
    
    
    2,217
    
    
    
    (951
    )Increase (decrease) in cash and cash equivalents
    
    
    33,408
    
    
    
    366Cash and cash equivalents, beginning of period
    
    
    10,822
    
    
    
    8,002Cash and cash equivalents, end of period
    
    $
    44,230
    
    
    $
    8,368
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 1. Basis of Presentation
   Products and Services
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)RevenueServices
    
    $
    29,157
    
    
    $
    30,127
    
    
    $
    97,233
    
    
    $
    85,685Products
    
    
    2,325
    
    
    
    2,272
    
    
    
    5,907
    
    
    
    9,361Other
    
    
    2,156
    
    
    
    1,897
    
    
    
    7,052
    
    
    
    6,096Total revenue
    
    $
    33,638
    
    
    $
    34,296
    
    
    $
    110,192
    
    
    $
    101,142Cost of RevenueServices
    
    $
    13,372
    
    
    $
    13,920
    
    
    $
    44,576
    
    
    $
    37,362Products
    
    
    691
    
    
    
    1,368
    
    
    
    1,726
    
    
    
    4,365Other
    
    
    
    
    
    
    28
    
    
    
    335
    
    
    
    348Total cost of revenue
    
    $
    14,063
    
    
    $
    15,316
    
    
    $
    46,637
    
    
    $
    42,075
  Seasonality in Results of Operations
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 New Accounting Pronouncements
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement
No. 115
 Fair
Value Measurements
 Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
  Accounting for Certain Hybrid Financial Instruments  an
Amendment of FASB Statements No. 133 and 140
 Use of Estimates
  Reclassifications
   2. Disposal of Assets
 Admissions Tech Business
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Revenues
    
    $
    
    
    
    $
    1,616
    
    
    $
    2,406
    
    
    $
    3,905Cost of revenues
    
    
    
    
    
    
    4
    
    
    
    392
    
    
    
    879Gross margin
    
    
    
    
    
    
    1,612
    
    
    
    2,014
    
    
    
    3,026Operating expenses (a)
    
    
    1,267
    
    
    
    1,310
    
    
    
    2,328
    
    
    
    3,029Income (loss) from discontinued operations
    
    $
    (1,267
    )
    
    $
    302
    
    
    $
    (314
    )
    
    $
    (3
    )
 
 (a)
    
    Excludes corporate overhead expense previously allocated to the Admissions Tech Business in
accordance with Emerging Issues Task Force Issue No. 87-24, Allocation of Interest Expense to
Discontinued Operations. The amount of corporate overhead expense added back to the Companys continuing
operations totaled $325,000, for the three months ended September 30, 2006, and $69,800, $1,055,000 for
the nine months ended September 30, 2007 and 2006, respectively.   December 31,2006(in thousands)Current assets
    
    $
    181Furniture, fixtures, equipment and software development, net
    
    
    138Goodwill
    
    
    500Other intangibles, net
    
    
    1,283Other assets
    
    
    59Non-current assets
    
    
    1,980Total assets related to discontinued operations
    
    $
    2,161Current liabilities
    
    $
    2,541Total liabilities related to discontinued operations
    
    $
    2,541
 Services and License Agreement
   -8-




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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 all amounts received by the Licensee generated from the sale of any other goods or services to any
post-secondary educational institution. 3. Stock-Based Compensation
 Effective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment (SFAS No. 123), using the modified
prospective transition application method. SFAS 123R requires the recognition of the fair value of
stock-based compensation in its statements of operations. Stock-based compensation expense
primarily relates to stock options and restricted stock under the Companys 2000 Stock Incentive
Plan. Compensation expense is recognized on a straight-line method over the requisite service
period. The fair value of stock options are estimated using the
Black-scholes option pricing formula which uses the following
assumptions in its fair value calculation at the date of grant for
the three and nine months ended September 30: Three Months ended September 30,
    
    Nine Months ended September 30,2007
    
    2006
    
    2007
    
    2006Risk free interest rates
    
    4.30%
    
    5.00%
    
    4.30% to 5.00%
    
    5.00%Expected forfeiture rate
    
    15%
    
    15%
    
    15%
    
    15%Expected life
    
    5.0 years
    
    5.0 years
    
    5.0 years
    
    5.0 yearsExpected volatility
    
    45.91%
    
    39.62%
    
    29.3% to 45.91%
    
    39.62% to 44.92%
 Information concerning all stock option activity for the nine months ended September 30, 2007 is summarized as follows: WeightedShares of
    
    Weighted
    
    AverageCommon
    
    Average
    
    Remaining
    
    AggregateStock
    
    Exercise
    
    Contractual
    
    IntrinsicAttributable to
    
    Price of
    
    Term (in
    
    Value (inOptions
    
    Options
    
    years)
    
    thousands)Outstanding at December 31, 2006
    
    
    3,155,527
    
    
    $
    6.97Granted at market
    
    
    3,510,000
    
    
    $
    5.55Options forfeited
    
    
    (425,057
    )
    
    $
    7.25Options exercised
    
    
    (140,634
    )
    
    $
    4.04Outstanding at September 30, 2007
    
    
    6,099,836
    
    
    $
    6.21
    
    
    
    7.46
    
    
    $
    12,409Vested and expected to vest at
September 30, 2007
    
    
    5,064,076
    
    
    $
    6.33
    
    
    
    6.99
    
    
    $
    9,716Exercisable at September 30, 2007
    
    
    2,425,039
    
    
    $
    7.13
    
    
    
    3.99
    
    
    $
    2,841
 As of September 30, 2007, the total unrecognized compensation cost related to nonvested stock
option awards amounted to approximately $4.3 million, including estimated forfeitures which will be
recognized over the weighted-average remaining requisite service period of approximately 3.74
years. Of the 3,510,000 options granted during the nine months ended September 30, 2007, 2,450,000
were granted outside of the 2000 Stock Incentive Plan. During 2007, the Board of Directors approved the granting of 280,940 shares of Restricted
Stock under the Companys 2000 Stock Incentive Plan to the senior management of the Company and the
outside members of the Board of Directors, having a grant-date fair value of $1.4 million. These
Restricted Stock awards generally vest quarterly over a two year period. As of September 30, 2007,
238,846 shares of Restricted Stock were outstanding with unrecognized compensation cost of $890,000
to be recognized over a period of 1.25 years.  Total stock-based compensation expense recorded for the three months ended September 30, 2007
and 2006 was $736,000 and $360,000, respectively. Total stock-based compensation expense recorded
for the nine months ended September 30, 2007 and 2006 was
$2.7 million and $660,000, respectively. Stock-based
compensation is recorded as operating expense within the
accompanying consolidated statements of operations.


4. Line of Credit


Credit Agreement


On July 24, 2007, the
Company paid down $15 million of debt outstanding including all
accumulated interest and other charges and terminated the credit facility.

Prior to that date, the Company entered into a Credit Agreement (the Credit Agreement), among the
Company, Princeton Review Operations, L.L.C., a wholly owned subsidiary of the Company (Operations), Golub
Capital CP Funding, LLC and such other lenders who become signatory from time to time, and Golub Capital
Incorporated (Golub), as Administrative Agent.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 5. Preferred Stock
 Series C Preferred Stock On July 23, 2007, the Company entered into a Series C Preferred Stock Purchase Agreement (the Purchase
Agreement) with Bain Capital Venture Fund 2007, L.P., and its affiliates, Prides Capital Fund I, L.P.
(Prides) and RGIP, LLC (collectively, the Purchasers), providing for the issuance and sale of $60,000,000
of the Companys Series C Convertible Preferred Stock (60,000 shares) at a purchase price of $1,000 per share
(the Series C Preferred Stock). Each share of Series C Preferred Stock is convertible into shares of the
Companys common stock at an initial conversion price of $6.00 per share, subject to adjustment. The Series C
Preferred Stock contains a compounding, cumulative 6% per annum dividend payable upon conversion of the
Series C Preferred Stock. Following the fourth anniversary of the issuance of the Series C Preferred Stock the
dividend shall no longer accrue unless declared by the Board of Directors of the Company (the Board).
Additionally, on or at any time after the eighth anniversary of the Issue Date, if requested by the holders
of at least 10% of the then outstanding Series C Preferred Stock, each holder of Series C Preferred Stock
shall have the right to require the Company to redeem all of such holders Series C Preferred Stock, for
cash, at a redemption price equal to the Original Purchase Price plus accrued and unpaid dividends. The
Company also has the right to redeem the then outstanding Series C Preferred Stock following the eighth
anniversary of the issue date, for cash, at a redemption price equal to the Original Purchase Price plus
accrued and unpaid dividends.   Series B-1 Preferred Stock
    Embedded derivatives and warrant
 Accounting for Derivatives and Hedging
Activities
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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
      Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
     Dividends
  -11-




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
   6. Income Taxes
 Accounting for Income Taxes
  ,
  7. Segment Information
     -12-




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 Three Months Ended September 30, 2007(in thousands)TestPreparation
    
    
    K-12Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    26,471
    
    
    $
    7,167
    
    
    $
    
    
    
    $
    33,638Operating expense (including depreciation
and amortization)
    
    
    13,387
    
    
    
    3,291
    
    
    
    8,658
    
    
    
    25,336Operating income (loss)
    
    
    2,648
    
    
    
    249
    
    
    
    (8,658
    )
    
    
    (5,761
    )Depreciation and amortization
    
    
    492
    
    
    
    926
    
    
    
    534
    
    
    
    1,952Other income (expense)
    
    
    
    
    
    
    
    
    
    
    (3,788
    )
    
    
    (3,788
    )Segment EBITDA
    
    
    3,140
    
    
    
    1,175
    
    
    
    (11,912
    )
    
    
    (7,597
    )Total segment assets
    
    $
    48,828
    
    
    $
    21,200
    
    
    $
    58,495
    
    
    $
    128,523Segment goodwill
    
    $
    31,006
    
    
    $
    
    
    
    $
    
    
    
    $
    31,006Expenditures for long lived assets
    
    $
    242
    
    
    $
    128
    
    
    $
    49
    
    
    $
    419
 Three Months Ended September 30, 2006(in thousands)TestPreparation
    
    
    K-12Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    26,708
    
    
    $
    7,588
    
    
    $
    
    
    
    $
    34,296Operating expense (including depreciation
and amortization)
    
    
    11,951
    
    
    
    4,664
    
    
    
    4,908
    
    
    
    21,523Operating income (loss)
    
    
    5,279
    
    
    
    (2,914
    )
    
    
    (4,908
    )
    
    
    (2,543
    )Depreciation and amortization
    
    
    605
    
    
    
    996
    
    
    
    503
    
    
    
    2,104Other income (expense)
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    18Segment EBITDA
    
    
    5,884
    
    
    
    (1,918
    )
    
    
    (4,387
    )
    
    
    (421
    )Total segment assets
    
    $
    52,227
    
    
    $
    22,746
    
    
    $
    24,637
    
    
    $
    99,610Segment goodwill
    
    $
    31,006
    
    
    $
    
    
    
    $
    
    
    
    $
    31,006Expenditures for long lived assets
    
    $
    474
    
    
    $
    1,973
    
    
    $
    645
    
    
    $
    3,092
 -13-




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 Nine Months Ended September 30, 2007(in thousands)TestPreparation
    
    
    K-12Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    81,090
    
    
    $
    29,102
    
    
    $
    
    
    
    $
    110,192Operating expense (including depreciation
and amortization)
    
    
    38,987
    
    
    
    11,478
    
    
    
    19,235
    
    
    
    69,700Operating income (loss)
    
    
    11,536
    
    
    
    1,554
    
    
    
    (19,235
    )
    
    
    (6,145
    )Depreciation and amortization
    
    
    1,592
    
    
    
    2,960
    
    
    
    1,630
    
    
    
    6,182Other income (expense)
    
    
    0
    
    
    
    
    
    
    
    (7,551
    )
    
    
    (7,551
    )Segment EBITDA
    
    
    13,128
    
    
    
    4,514
    
    
    
    (25,156
    )
    
    
    (7,514
    )Total segment assets
    
    $
    48,828
    
    
    $
    21,200
    
    
    $
    58,495
    
    
    $
    128,523Segment goodwill
    
    $
    31,006
    
    
    $
    
    
    
    $
    
    
    
    $
    31,006Expenditures for long lived assets
    
    $
    552
    
    
    $
    355
    
    
    $
    624
    
    
    $
    1,531
 Nine Months Ended September 30, 2006(in thousands)TestPreparation
    
    
    K-12Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    75,141
    
    
    $
    26,001
    
    
    $
    
    
    
    $
    101,142Operating expense (including depreciation
and amortization)
    
    
    37,587
    
    
    
    13,459
    
    
    
    12,896
    
    
    
    63,942Operating income (loss)
    
    
    11,882
    
    
    
    (3,861
    )
    
    
    (12,896
    )
    
    
    (4,875
    )Depreciation and amortization
    
    
    2,181
    
    
    
    2,737
    
    
    
    1,343
    
    
    
    6,261Other income (expense)
    
    
    
    
    
    
    
    
    
    
    (77
    )
    
    
    (77
    )Segment EBITDA
    
    
    14,063
    
    
    
    (1,124
    )
    
    
    (11,630
    )
    
    
    1,309Total segment assets
    
    $
    52,227
    
    
    $
    22,746
    
    
    $
    24,637
    
    
    $
    99,610Segment goodwill
    
    $
    31,006
    
    
    $
    
    
    
    $
    
    
    
    $
    31,006Expenditures for long lived assets
    
    $
    1,104
    
    
    $
    3,043
    
    
    $
    2,076
    
    
    $
    6,223
 Reconciliation
of Segment EBITDA  to net loss from continuing operations before
income taxes (in thousands):
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Segment
EBITDA
    
    $
    (7,597
    )
    
    $
    (421
    )
    
    $
    (7,514
    )
    
    $
    1,309Depreciation
and amortization
    
    
    (1,952
    )
    
    
    (2,104
    )
    
    
    (6,182
    )
    
    
    (6,261
    )Equity in the income (loss) of affiliates
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (50
    )Interest
income
    
    
    165
    
    
    
    (168
    )
    
    
    (677
    )
    
    
    (390
    )Net loss from continuing operations
before income taxes
    
    $
    (9,384
    )
    
    $
    (2,693
    )
    
    $
    (14,373
    )
    
    $
    (5,392
    )
 -14-




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 8.
    
    Income (loss) Per Share
 Earnings per Share.
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Income (loss) from continuing operations
    
    $
    (8,584
    )
    
    $
    (2,693
    )
    
    $
    (13,095
    )
    
    $
    (5,392
    )Income (loss) from discontinued operations
    
    
    (2,384
    )
    
    
    302
    
    
    
    2,535
    
    
    
    (3
    )Less preferred dividends and accretion of issuance costs
    
    
    (883
    )
    
    
    (106
    )
    
    
    (1,090
    )
    
    
    (411
    )Net income (loss) attributed to common stockholders
    
    $
    (11,851
    )
    
    $
    (2,497
    )
    
    $
    (11,650
    )
    
    $
    (5,806
    )Weighted average common shares outstanding for the period
    
    
    28,031
    
    
    
    27,575
    
    
    
    27,823
    
    
    
    27,574Basic earnings per share:Income (loss) from continuing operations
    
    $
    (0.34
    )
    
    $
    (0.10
    )
    
    $
    (0.51
    )
    
    $
    (0.21
    )Income (loss) from discontinued operations
    
    
    (0.08
    )
    
    
    0.01
    
    
    
    0.09
    
    
    
    (0.00
    )Net income (loss)
    
    $
    (0.42
    )
    
    $
    (0.09
    )
    
    $
    (0.42
    )
    
    $
    (0.21
    )
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Net effect of dilutive stock options-based on the
treasury stock method
    
    
    149
    
    
    
    161
    
    
    
    160
    
    
    
    164Effect of convertible preferred stock-based on the
if-converted method
    
    
    7,730
    
    
    
    1,165
    
    
    
    2,577
    
    
    
    1,3547,879
    
    
    
    1,326
    
    
    
    2,737
    
    
    
    1,518
 9.
    
    Comprehensive Income (Loss)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Net income (loss) attributable to common stockholders
    
    $
    (11,851
    )
    
    $
    (2,497
    )
    
    $
    (11,650
    )
    
    $
    (5,806
    )Foreign currency translation adjustment
    
    
    61
    
    
    
    5
    
    
    
    76
    
    
    
    (20
    )Total comprehensive income (loss)
    
    $
    (11,790
    )
    
    $
    (2,492
    )
    
    $
    (11,574
    )
    
    $
    (5,826
    )
 -15-




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 10. Restructuring
   11. Legal Matters
  ex parte ex parte
  ex parte
 ex parte Ex Parte inter partes inter partes
 -16-




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\

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 ex parte
   12.
Stockholders Equity
   13. Subsequent Events
  -17-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  Test Preparations Services Division
  K12 Services Division
  Former Admissions Services Division
  -18-




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##### Table of Contents



Results of Operations
 Comparison of Three Months Ended September 30, 2007 and 2006
 Revenue
    Cost of Revenue
    Operating Expenses
  
    
    Test Preparation Services operating expenses increased by $1.4 million, or 12.0%, from
$12.0 million in 2006 to $13.4 million in 2007. Salaries and related expense increased
$1.4 million driven by increased headcount in SES business in anticipation of the fall
sales cycle.
    
    K-12 Services operating expenses decreased by $1.4 million, or 29.4%, from $4.7 million
in 2006 to $3.3 million in 2007. Salaries and related expense decreased $887,000 primarily
as a result of headcount reductions, lower commissions and bonuses and increased
operational efficiencies. Research and development costs decreased $711,000. Other general
administrative cost decreased by $435,000 primarily as a result of lower bad debt expense
and travel costs. These decreases were partially offset by $617,000 of restructuring costs
related to the loss of a significant account and other operating efficiencies.
    
    Corporate operating expenses increased by $3.8 million or 77.6%, from $4.9 million in
2006 to $8.7 million in 2007. Corporate operating expenses included severance costs of $1.2
million as part of the restructuring
 -19-




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##### Table of Contents



charge incurred to move the finance operations and general counsel from New York City to
Boston. The Company also incurred $400,000 of higher professional fees and $350,000 related
to a litigation settlement.
 Other income (expense)
  Comparison of Nine Months Ended September 30, 2007 and 2006
 Revenue
    Cost of Revenue
    Operating Expenses
  
    
    Test Preparation Services operating expenses increased by approximately $1.4 million,
or 3.7% from $37.6 million in 2006 to $39.0 million in 2007 primarily due to salaries and
related expenses due to increased SES headcount to support increased SES revenue.
    
    K-12 Services operating expenses decreased by $2.0 million, or 14.7%, from $13.6
million in 2006 to $11.5 million in 2007. Salaries and related
costs decreased by approximately $2.6 million primarily
as a result of salaries and related costs related to headcount reductions, lower
commissions and increased operational efficiencies partially offset
by overhead costs.
    
    Corporate operating expenses increased by $6.3 million or 49.2%, from $12.9 million in
2006 to $19.2 million in 2007. The increase is primarily due to severance costs of $1.2
million for the restructuring charge described above, $1.1 million of higher professional
service fees as well as $1.6 million of other non-recurring costs related to the
restatement of the 2006 financial statements, a litigation settlement and other costs
 -20-




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##### Table of Contents



to move the finance department, and duplicate technology costs due to the consolidation of
certain data center activities.
 Other income (expense)
  Liquidity and Capital Resources
       -21-




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##### Table of Contents



Seasonality in Results of Operations
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4. Controls and Procedures
  Scope of the Controls Evaluation
  -22-




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##### Table of Contents



Conclusions
  Changes in Internal Control over Financial Reporting
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  ex parte ex parte
   -23-




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##### Table of Contents



ex parte
 ex parte Ex Parte inter partes inter partes
 ex parte
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description10.54
    
    
    Amendment, dated as of September 7, 2007, to Service and License Agreement dated as of April 27
2007 between the Company and Higher Edge Marketing Services, Inc.31.1
    
    
    Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 -24-




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##### Table of Contents



SIGNATURES
  THE PRINCETON REVIEW, INC.By:
    /s/ Susan RaoExecutive Vice President, Finance and Treasurer(Duly Authorized Officer and Principal
Financial and Accounting Officer)  -25-